Has America's Passion for Plastic Cooled?

Gillian Tett, Financial Times

Friday, 7 Sep 2012 | 12:04 PM ETFinancial Times

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Peter Dazeley | Getty Images

As the Democratic National Convention has unfolded this week in Charlotte, North Carolina, White House officials have been scouring the economic data for something – anything – that might count as good news.

So here is one little statistic that has hitherto received surprisingly little attention: according to calculations from the Federal Reserve Bank of New York, American credit card debt has tumbled to its lowest level since the second quarter of 2002. More striking still, the outstanding balance – of $672 billion – is 22.7 percent below its 2008 peak.

Yes, you read that right. Although Americans are (in)famous for their addiction to credit card debt, that love affair is cooling, or being forcibly cooled. By the middle of this year, the number of credit card accounts in circulation had tumbled to 383 million, 23 percent below its 2008 peak, and fresh applications for credit were declining too. Put another way, while cards are still being flogged to consumers (and even sometimes marketed, via direct mail, to pets), not all Americans are saying “yes.”

Now, this trend needs to be seen in a bigger context. Most notably, it follows a massive – and massively dangerous – long spell of expansion. Thus the declines have only brought credit card borrowing back to levels seen a decade ago; by international standards, credit card debt in the United States remains large.

Yet the trend highlights a point politicians and investors often ignore: that while public sector debt has exploded in the past five years, in some parts of the private sector, deleveraging is underway.

True, it has not produced a feel-good factor yet; on the contrary, as consumers cut their use of plastic, that is crimping retail spending. But in the longer term, this adjustment is necessary. An America with a mere 383 million credit cards floating about, rather than almost 500 million, may be a country that is slowly healing itself from a crazy credit boom.

By any standards, the data are striking. Taken as a whole, total consumer borrowing was $11.4 trillion in June this year, $1.3 trillion below its 2008 peak. Some of that decline reflected lower card usage. But most of it was triggered by a fall in mortgage debt.

Back in the days of the credit bubble, for example, net mortgage borrowing grew about $200 billion each year, as Americans treated their homes like ATMs. However, in 2009 there were net repayments of $134 billion, followed by repayments of $213 billion and $241 billion in 2010 and 2011. This year net repayments have accelerated further.

Some of this decline in borrowing occurred in tragic, forced circumstances. Millions of Americans have been tossed out of their homes. Thus in 2010 and 2011 defaults and delinquencies removed $660 billion worth of mortgage debt. But “voluntary” factors have been increasingly important too. Households are now choosing to assume less mortgage debt – and banks are becoming more wary about lending.

More interesting still, a split has emerged between different types of debt. The one place where debt has steadily risen since 2007 is student loans. This might be because education costs have been rising. It might also be that consumers consider education expenditure to be less discretionary.

And what is particularly intriguing about the trend with credit card usage is that consumers appear to be using less of their plastic even though delinquency rates have declined; so too with mortgage debt.

So what should investors make of this?

There are at least two important points to ponder. First, the data are a timely reminder of the limits of monetary policy. After all, this decline in lending has occurred when interest rates have been falling. But consumers (and banks) have not responded to those declining rates because they have been scurrying to repair their balance sheets.

In some senses, this is entirely unsurprising; indeed, it is desirable. Yet it also shows how broken the classic transmission mechanism has become – and is likely to remain for some time.

Second, the data also show how important it is to keep watching micro-level behavioral trends. For the key point to understand is that social attitudes to credit are not constant, but can shift in subtle but important ways that have a nasty habit of upending macroeconomic models.

One set of behavioral shifts occurred during the credit boom. (In 2007, for example, it became clear that, whereas Americans used to prioritize mortgage repayments ahead of car loans or credit cards, that hierarchy of priorities was switching round, playing havoc with default predictions.) There will undoubtedly be more changes in attitude as a result of the credit bust.

Anyone wanting to understand why the economy is so sluggish in the United States, in other words, needs to use ethnography and psychology as much as economics; even – or especially – when it comes to working out why voters continue to feel so glum.